By Jordon Rosen, CPA, MST, AEP®
It’s never too early to think about tax planning and with new rules in force for 2018 (Tax Cuts and Jobs Act, the “Act,” or “TCJA”), NOW is a good time. Below are a few key provisions of the Act with related planning tips. Keep in mind that most individual provisions are temporary and expire after 2025.
The Act both reduces tax rates and expands the brackets, with the maximum tax rate lowered from 39.6% to 37%. But beware – the new withholding form (Form W-4) is proving to be inaccurate for many workers, resulting in substantial over- and under-withholding in some cases.
The preferred rates for qualified dividends and long-term capital gains were retained, but the cut-off where the rate increases from 15% to 20% is now determined when adjusted capital gains exceed a dollar threshold ($479,000 in 2018 for married couples filing a joint return), rather than when the individual is in the top rate bracket as under pre-Act rules.
Unlike the change which repealed the alternative minimum tax for corporations, TCJA retains the AMT for individuals, but increases both the exemption amounts and the statutory threshold amounts. This means that fewer taxpayers should be subject to the AMT from 2018 through 2025. Combined with the lower rates, you may see a significant decrease in your overall liability for 2018, so you will want to review and possibly adjust your withholding and/or estimated payments for the year.
The Act doubles the standard deduction and makes several changes to the availability of certain itemized deductions. Combined, more taxpayers are expected to use the standard deduction beginning in 2018. This may or may not impact the availability of itemizing for state tax purposes, so it is important to continue to keep receipts and track deductions. The Act retained the additional standard deduction for taxpayers 65 years or older and/or blind. It also suspends all personal exemptions during 2018-2025.
The major changes to federal itemized deductions include (1) limiting the state and local tax deduction (including real estate taxes) to $10,000 (married filing a joint return, (2) eliminating all miscellaneous deductions that were otherwise subject to the 2% of adjusted gross income floor, (3) lowering the allowable mortgage interest deduction threshold to $750,000 on new mortgages, (4) eliminating the deduction for interest on home equity loans unless used for the purchase, renovation, or construction of your home, and (5) limiting the deduction for casualty losses except in the case of losses in a federally declared disaster area. If you are close to the threshold for itemizing deduction, consider “bunching” your deductions every other year, so one year you itemize and the other year you claim the standard deduction. A positive change was the expansion of the deduction for cash contributions to charity from 50% to 60% of adjusted gross income, but a charitable deduction is no longer available for donations to a college or university in exchange for athletic event seating rights.
Qualified Business Income Deduction
A key provision of the Act is the 20% qualified business income deduction (see my prior blog post for details), available to individuals, estates, and trusts. Subject to certain wage and asset testing, the deduction can be claimed in full when taxable income is below $315,000 for married couples and $157,500 for all other filers. The deduction is limited when taxable income exceeds $315,000/$157,500 and completely eliminated when taxable income exceeds $415,000/$207,500, in the case of taxpayers working in specified services such as law, accounting, medicine or consulting. If you are over the threshold, consider ways to lower your taxable income by (1) fully funding employer or self-employed retirement accounts, (2) harvesting losses, (3) prepaying certain expenses, or (4) creating and funding a donor-advised fund before the end of the year.
Notwithstanding the 20% business deduction, if you anticipate a loss from a partnership or S corporation, you will want to be sure you have sufficient basis to deduct those losses. This can be done by making a capital contribution to the partnership or S corporation or making a loan directly to the entity (note that the mere guarantee of an S corporate loan does not create basis for claiming a loss).
Figuring your liability for 2018 after TCJA will be tricky, so you will want to consult with an experienced CPA about your situation.
If you have questions or want further information on the above or other income, retirement or estate planning techniques, please contact Jordon Rosen at email@example.com.
Disclaimer : All blog posts are valid as of the date published.